<p>If you did not know there was a global pandemic and you read Hilton (NYSE: HLT) closed 1000 hotels during the quarter which led to a 22-24% reduction in revenue per available room (RevPAR), I’m sure you did not would not intend to buy Hilton shares.
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However, we are in a global pandemic. Hilton’s first quarter results could have been much, much worse. While the immediate future does not look too bright, weary travelers will eventually return to their 6,250 hotels around the world.
Believe it or not, despite the carnage, Hilton’s stock remains an excellent long-term game. Here’s why.
I would hate to be Airbnb
Investor Place Laura Hoy recently discussed three ways that the new coronavirus will change markets. One of the ways we will see change is that people will not be nearly as eager to get on planes and sleep in bacteria-infected hotel beds. Referring to the former head of the Food and Drug Administration, Scott Gottlieb, Hoy made it clear that we will not return to normal at any time.
And while it’s true that Hilton will suffer significantly from Covid-19, if one of the world’s largest hotel chains can not bounce back, I doubt it really matters what’s happening to the markets; we will all be penniless and live in cramped huts.
First, before we think about the bright side of the street, let’s look at some of the damage that was done to Hilton in March:
Operations have been suspended at 16% of the global hotels April 14, including 60% of those in Europe. RevPAR in Asia fell by 6% in January, 50% in February and an estimated 74-76% in March. System-wide, RevPAR increased by 1% in January, fell by 4% in February and decreased by an estimated 56-58% in March. At present, the occupancy rate of the hotel chain is 22% in China, 17% in the Americas and 13% in Europe, the Middle East and Africa.
As gloomy as this sounds, Marriott’s (NYSE: MAR) figures are even worse.
Currently, about 25% of the 7,300 hotels are closed. Its occupancy rate in North America is 10% and RevPAR on a global basis fell 60% in March. On a global basis, Hilton closure rate that is 900 basis points lower than the Marriott. In America, the occupancy rate is 700 points higher than Marriott and its RevPAR in March decreased by about 200-400 points less.
So it can always be worse. It could be Airbnb. If you think people will feel insecure about staying in hotel rooms, imagine living in someone’s house in exotic locations where it is possible that the property has never been sterilized or kept clean.
“Hotel companies because they are so centralized that they can respond to these things … they can make sure that the rooms are cleaned to make people more comfortable. With [the coronavirus] the last thing I want to do is sleep in someone else’s bed, says Dror Poleg, co-chair of the Urban Land Institute’s Technology and Innovation Council.
He feels that Airbnb was fighting before the coronavirus. Now it will only get harder to bounce back. I really wonder if it can do enough to stave off extinction.
In times like these, the brand is important. Hilton has it in spades.
The conclusion at Hilton Stock
In times of crisis, investors overlook the immediate shift and choose to consider what is the most likely scenario for the companies they are considering investing. When it comes to Hilton, there is no way out of business.
“We currently expect that, even if current levels of very low occupancy persist, this cash position, together with the net income from the proposed $ 500 million offer, will total the principal amount of older insecure banknotes. [described in Item 7.01 of the SEC filing]”will provide us with sufficient liquidity to finance our operations over the next 18 to 24 months,” Hilton said in a press release on April 14.
“Furthermore, the company has no outstanding debt that falls due before June 2024.”
The wise person considers how realistic it would be for the occupancy rate to remain at current levels for more than 6-12 months. Sure, they may not return to 70-80% where they have been for several years, but they will not sit permanently at 17%, as is the case for Hilton in America.
Investors make money on strong brands that work well. Hilton is one such brand.
For those who bought in March for $ 56, you got an excellent deal. While it is possible that Hilton will fall back below $ 60, I get the feeling that you will do well in 3-5 years and buy for $ 72.
Hilton shares are a long-term purchase.
Will Ashworth has been writing about full-time investing since 2008. Publications where he has appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger and several others in both the United States and Canada. He especially likes to create model portfolios that pass the test of time. He lives in Halifax, Nova Scotia. At the time of writing, Will Ashworth had no position in any of the above securities.